Massachusetts Estate Planning: Life Insurance and ILITs Explained
Let’s face it: life insurance isn’t exactly the kind of topic that makes people jump out of bed in excitement. But when it comes to Massachusetts estate planning, that tidy little death benefit might be doing more than just taking care of your loved ones—it might also be setting off alarms with the Massachusetts Department of Revenue.
Yep. Even after you’re gone, the Commonwealth still wants to know if you owe them a little something. But don’t worry—there’s a clever, perfectly legal way to tell the taxman to take a hike: Irrevocable Life Insurance Trust, or ILIT (pronounced “eye-lit”). Think of it as your estate plan’s secret weapon—one that can keep your life insurance from ballooning your taxable estate while still providing your family with the financial cushion you intended.
Let’s unpack this in plain English (with a touch of humor to keep it digestible).
Life Insurance: The Double-Edged Sword
Most people buy life insurance for all the right reasons—to make sure their family is financially secure, the mortgage is paid, or the kids’ college dreams stay alive if something happens to them. It’s an act of love and foresight.
But here’s the not-so-fun twist: in Massachusetts, the death benefit of a life insurance policy is included in the calculation of your taxable estate. So, if your policy pays out $1 million to your beneficiaries when you die, that $1 million is added to your other assets (home, retirement accounts, investments, etc.) to determine whether you owe estate taxes.
And in Massachusetts, you don’t have to be a multimillionaire to hit the threshold.
The Massachusetts Estate Tax: Smaller Exemption, Bigger Headache
As of 2024, the Massachusetts estate tax exemption sits at $2 million per person. That means if your total estate—including your life insurance—is worth more than $2 million, your heirs could owe estate taxes to the Commonwealth.
For good or bad, even a modest home and a life insurance policy can push your estate above the threshold here in Massachusetts.
For example:
- Home in the suburbs: $900,000
- Retirement accounts: $600,000
- Life insurance: $1,000,000
Boom—your estate is now worth $2.5 million. Congratulations! You’ve crossed into taxable territory, and the Commonwealth will want its share.
Enter the ILIT: Your Estate Plan’s Tax-Savvy Hero
Here’s where things get interesting. An Irrevocable Life Insurance Trust (ILIT) can remove the death benefit of your policy from your taxable estate entirely—meaning that million-dollar payout won’t count toward your $2 million limit.
How does it work?
When you create an ILIT, you’re essentially handing ownership of the life insurance policy to the trust. The trust—not you—becomes the legal owner and beneficiary of the policy. Because you no longer own it, the death benefit doesn’t get counted in your estate.
When you pass away, the insurance company pays the death benefit directly to the ILIT. The trustee (whom you choose) then uses the funds to carry out your wishes—typically to support your spouse, kids, or other beneficiaries. The money can also be used to pay any estate taxes your estate owes, keeping your family from having to liquidate other assets to cover the bill.
It’s an elegant solution: the policy stays available to your loved ones, but the taxman can’t touch it.
The Catch: It Has to Be Irrevocable
The “I” in ILIT stands for irrevocable, and that’s not just a fancy legal term—it’s a warning label. Once you transfer a life insurance policy into an ILIT, it’s no longer yours. You can’t change the beneficiaries, borrow against the policy, or cancel it. It’s officially out of your control.
That’s why ILITs work best for term policies or permanent policies where you don’t plan to touch the cash value. If you think you might need access to the cash surrender value or want to make changes later, an ILIT might not be the right fit.
Think of it this way: you’re freezing the policy in time. You’re saying, “This money is for my family’s future—not mine.”
Timing Matters (and So Does Good Advice)
If you already own a life insurance policy and decide to move it into an ILIT, there’s a three-year rule to watch out for. The IRS says that if you die within three years of transferring the policy, the death benefit still gets pulled back into your estate for tax purposes.
That’s why it’s often best to have the ILIT buy the policy from the start—so you can skip that three-year waiting period altogether.
But, as with most things involving taxes and trusts, timing and precision are everything. This isn’t something to DIY over a weekend with an online template. Setting up and maintaining an ILIT requires careful drafting, proper funding, and attention to detail—especially when it comes to premium payments and annual gift tax rules.
Why It’s Worth the Effort
Yes, ILITs are a bit of work. They come with paperwork, trustee responsibilities, and a dose of legal complexity. But the payoff is huge:
- You reduce your taxable estate and potentially save your family hundreds of thousands of dollars in estate taxes.
- You protect your life insurance payout so it goes exactly where you want it.
- You create liquidity in your estate so your heirs aren’t scrambling to sell assets just to pay taxes.
It’s financial peace of mind—with a side of Massachusetts tax strategy.
Let’s Make Your Life Insurance Work Smarter
At Ladimer Law, we love helping clients make their estate plans as efficient and elegant as possible (and yes, we try to make it fun, too). Life insurance can be a powerful tool for your family’s future—but only if it’s structured the right way.
If you’re wondering whether your policy might push you over the Massachusetts estate tax limit, or if an ILIT could help you preserve more of your legacy, let’s talk. We’ll walk you through the pros and cons, the numbers, and how it fits into your overall estate plan.
After all, your life insurance should support your loved ones—not the state’s tax coffers.
So, before your “rest in peace” becomes “rest in paperwork,” reach out to Ladimer Law. We’ll help you make sure your plan is airtight, your taxes are minimized, and your legacy is exactly what you intended—loving, lasting, and tax-efficient.
Until Next Time,
Julie